Why College Prices Skyrocket

Five hundred percent over inflation; think about that number for a moment. The cost of a 4 year college or university education has risen 500% above the inflation rate since the 1980’s. The number is simply astounding. Price that number in any other commodity and watch the reaction. Let’s take the price of electricity. The average American household in 1985 paid 7.39 cents per kilowatt hour for electricity. In 2011, the same American household paid 11.80 cents per kilowatt hour. This represents a 37% in the price of electricity during this time period. In this example, a household paying $50/month in electricity in 1985 would only pay $68.50/month in 2011.

Now, let’s increase that same electric bill by 500%. This mean that the $50 per month electric bill in 1985 jumps to $300 per month in 2011. Per annum, the average American would pay $600 per year in 1985 versus $3600 per year in 2011. People would be rioting in the streets if this was the case. Nothing in our current economy that we spend money on has inflated in price like higher education. Yet, no one says a word about the price increase. They fill out lengthy applications, borrow money, and write essays to get in. But why? Why are people beating in the door and why is the cost skyrocketing?

There are two reasons. People line up out of the door because they have simply been told that this is the way to go. Since WWII there has been a growing chorus of praise that has been sung to the younger generations about the virtues of higher education. Any child who went through school heard this chorus all of the time. Being told, “Get good grades so you can go to college” and “People who went to college make one million more dollars that people who don’t!” were phrases that we all heard. The preachers of higher education have orchestrated one of the best known public relations campaign in history, and we all bought what they were selling. We witnessed the greatest generation use their G.I. bills to go to college and get great jobs. These veterans then sent their children (the baby boomers) to college and they settled in to great jobs. These baby boomers then turned to their children with the same advice.

But something changed along the way to graduation day. The machine known as higher education was taking on a life of its own. The message was out. Movies like Animal House portrayed college as one big party. The best four years of your life. And this was only one of many portrayals of life in the ivory tower. It was becoming a norm in society for people to leave high school and enter into higher education.

The second happening was that the government became involved in the money lending business. In 1965, the Free Application for Federal Student Aid act was passed. Also known as FAFSA, it has become the go-to place for incoming students to get money to pay for school. But this involvement in the paying process is precisely the problem.

In a pure economy, the market dictates the price of goods and services. Meaning that if a population in a certain geographical region only has so much cash on hand to pay for education, then the price of that education will be set according to how much the population can pay. Before 1965, the price of college was very cheap even when we calculate the income of the day. My father showed me a tuition bill of his from 1969 when he attended a small Baptist college in Arkansas. The price of one hour was $12. His total tuition for 120 hours of college was $1,440. If we add in meal plans, price of dorms and other such costs associated with college, his parents probably spent around $6,000 for his college experience. That same college today costs about $20,000 per year, $80,000 in all.

What happened?

Government intrusion into the marketplace is the white elephant in the room. In 1965, with the passage of FAFSA, the government sent out a message to all colleges and universities. The message was, “We will guarantee that all of your customers will be able to pay the bill no matter what.” All the while there was a public relations machine working to brain wash all students into thinking that you either go to college or you end up broke.

Think about that from a providers’ standpoint. The universities provide a product that is being marketed, at no cost to them, to every high school student in the country. At the same time those high school kids are being guaranteed the money in the form of loans that are backed by the federal government. So the universities are being guaranteed payment for the product they provide! This is an amazing deal for them. It ensures a virtual river of customers with loan money to boot.

This begs the question: if this is the circumstance that the universities find themselves in, why would they ever lower the price? The short is answer is that they will never lower the price. Let’s put this example onto a different business. Let’s say you own a coffee shop and the federal government spends decades convincing people that coffee is wonderful and they should drink it by the gallon. The federal government places posters in the offices of high school guidance counselors all over the country extolling the virtues of coffee. Then the federal government approaches the coffee shop owner and says, “We’ll financially promise that your customers will always have the cash needed to buy your coffee.” What motivation would anyone have to lower the price? Coffee would cost $10 per cup. Why not? The customer will always have the money.

The ease of FAFSA

Having served in the US Navy, I paid into the G.I. bill. I used the bill to obtain a college degree once out of the service. Back in those days, the G.I. bill paid you in the middle of the month. But the college wanted their money up front. So I could either shell out thousands of my dollars or I could use FAFSA to carry the loan and then pay the loan back as the G.I. bill paid me. Since I’d be paying off the loan very quickly, I chose to use FAFSA.

Not knowing anything about borrowing money for school, I went to the Department of Education website and began to apply. I was shocked at how quickly I was approved. Within 20 minutes I had been approved of two Bank of America loans at 7% for $6,000 each. With the snap of a finger, I was loaned $12,000. No one asked me for pay stubs, background check, nothing. I was a 27 year old military vet with the maturity to handle the loan. But handing $12,000 to an eighteen year old is a like giving alcohol to a drunkard. It’s simply a bad idea.

The Presidents

I have a relative in higher education. Having spent 20 years as a professor and 11 years in administration, I can witness to the fact that money is the biggest issue in the back office of every educational institution in our country. Dealing with state legislatures and governor’s, enforcing tuition increases, etc. is 90% of what administration does. It’s all about finding new revenue sources. Many times we have sat for drinks on the back porch while being told war stories of meetings with the governor and how the university needed to raise cash.

College presidents are smart people, and they know a golden goose when they see one. They know that the product they provide is being mass marketed by the government for them, and that same government backs the customer. In today’s world, the market is not dictating the price. The river of easy money flowing from Washington D.C. is dictating the price. As long as that river of money is flowing, the price of tuition will continue to go up.

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You are correct dogman. It is the next housing crash. The only problem is that the housing crash at least has land and houses to back the loans (albeit the value dropped, at least there were still houses present).
When the student loan crash hits, there is zero collateral backing it. Only the bright young minds that borrowed the money.
I don't look forward to this.

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You are right, it's not. As long as the river of money from DC continues, prices will go up and debt will increase.
I don't want to believe that this is done on purpose. But there have got to be people in DC that understand the simple economics of this.